The following commentary is provided by Vesta Realty Partners.
After several hundred meetings in 2023 with US pensions and their consultants, below are a few key take-aways:
1. US Pensions were fully allocated and generally expressed a desire for value add and opportunistic direct investments. Investor rationale was attributed to a lack of transaction activity that left many of their fund commitments uncalled, so visibility into deployment is critical. The increased desire for higher returning strategies was partially driven by market risk and the associated opportunity set. For instance, many managers began pitching value add returns for core plus risk as debt maturities and the realties of a dilutive refinancing began to impact sellers willingness to be market sellers. As a result, opportunistic strategies captured 45% of dollars raised in 2023 driven primarily by Blackstone's Fund X.
2. If you are not a top 20 investment manager, investors are prioritizing product specialists either via product type or geography. In 2023, 60% of the capital raised ($54.50B) was attributed to 10 funds (8 of which were value add / opportunistic). The take-away is investors achieve diversification through large diversified managers and seek specialization from smaller managers. As an emerging or middle market manager, it is critical to avoid style drift and stay focused on a market or product type.
3. Despite 2023 being one of the worst capital raising years since the GFC, most US pensions forecasted substantial deployment goals for 2024 albeit at a reduced clip compared to previous years.
4. Macro headwinds paralyzed decision making including valuation concerns, interest rates, limited transaction volume, and record levels of dry powder. These headwinds only exacerbated the bid ask spread in the market, which is a reason direct investments continue to receive quick feedback.
Our view is managers that will win in today's environment have a differentiated platform and actionable pipeline.
